Two proposed bills aim to make royalty payments more fair for internet radio - but only one has musicians' best interests in mind

Here’s one thing (I think) we can all agree on: royalties paid to recording artists for music streaming aren’t fair. What would be fair, though, is where the arguments begin. Here’s a quick recap of the current state of affairs:

* Anyone streaming copyrighted music in a “non-interactive” manner (e.g., internet radio stations like Pandora) must pay royalties that go to labels and performing artists. Broadcasters do not pay these royalties for the music they stream over the air (they do, however, pay them for whatever music they stream).

* Satellite radio and cable TV systems that play music also pay royalties to labels and performers, like streamers do. However, they pay at a much lower rate than streamers, based on a fixed percentage of their revenue (e.g., SiriusXM currently pays 8 percent). Music streamers generally pay based on the number of people listening to their streams; the more people that listen, the more they pay. In reality this means a much higher rate of revenue goes to these royalties; in Pandora’s case, more than 50 percent.

Internet-only stations (e.g. Pandora), as well as satellite radio and cable TV, are unhappy because they pay royalties that broadcasters don’t have to. Music streamers of any sort (whether they also broadcast like Clear Channel or not) are unhappy because satellite radio and cable TV pay less than they do. Labels and artists are unhappy because they don’t get paid for music that gets broadcast, and they don’t get paid as much for music played on satellite radio or cable TV.

Some of those frowns are about to get turned upside down, though, because recently two competing bills have been introduced in Congress to level the playing field. The thing is, they each level the playing field in a very different way.

On one hand you have the Internet Radio Fairness Act, which would lower the royalty rates that music streamers pay, to be more comparable with what satellite radio and cable TV pay. This bill is supported by music streamers, such as Pandora and Clear Channel. It does not propose to make radio stations pay these royalties for music they broadcast. Needless to say, artists and labels are against this bill.

On the other hand, you have the Interim Fairness in Radio Starting Today Act, which would increase the rates paid by cable and satellite TV to be more in line with what the streamers pay. In addition it would also remove royalty exemption for broadcast music. Not surprisingly, this bill is supported by labels and artists and opposed by music streamers, broadcasters, and cable/satellite radio.

In a nutshell, if you want artists to get paid more, you support the Interim Fairness in Radio Starting Today Act; if you’d like Pandora to pay less in royalties, you support the Internet Radio Fairness Act.

To be honest, I’ve had trouble to trying to decide which way I lean. I love Pandora and the service they provide to me, so I’d like to see it survive. I’ve also worked with many radio stations over the years (public broadcasters) and know that they are very burdened by the costs of streaming music (not to mention the work involved around royalty reporting - that’s a whole other matter). But I also believe the artists really should be getting paid when their music is played, whether over-the-air or online, and more than just a token payment.

To help clarify my thoughts, I gathered some recent data on music streaming royalties and did some quick back of the envelope calculations to see what amounts of money we’re talking about.

Performance royalties in the United States all get collected and administered through a single organization, SoundExchange. Looking at their most recent annual report we see that they received a grand total of $377,551,216 in royalty payments for 2011. 5.3% of that, or $20,134,135 went to administrative costs. The remaining $357,417,801 was to be divided up like so:

50% ($178,708,541) to record labels

45% ($160,837,686) to the featured performers on the recordings

5% ($17,870,854) to non-featured performers and vocalists

In order to get paid by SoundExchange, featured performers must register with them. Currently, there are 70,000 such artists. That means that, on average, those featured performers each earned $2,298 in 2011 from music streaming (and satellite radio and cable TV). That’s not a whole lot of money.

Now, of course, this is way too simplistic; those royalties aren’t split up evenly among artists. Most of them go to the artists whose music gets played the most (like Justin Bieber - sigh). So, in fact, I’d wager that the vast, vast majority of those 70,000 artists got paid way less than $2,298, if they got paid at all. Non-featured musicians (such as session players) get an even smaller slice of the pie.

Crude as this analysis is, though, it helps to crystallize my thinking: I’m on the side of the musicians. They should be paid when their songs are played, whether on terrestrial radio, satellite radio or the internet - and they should be paid the same across these platforms. Most importantly, they shouldn’t be getting paid any less than they are now.